Implications: A surge in gasoline led consumer prices higher in June, generating the largest monthly gain in the overall CPI since February. Gasoline, up 6.3% in June, accounted for roughly two-thirds of the overall 0.5% monthly gain for the consumer price index. The "core" CPI, which excludes food and energy, increased 0.2% in June, exactly as the consensus expected. The gain in the core CPI was led by rent (both actual rent and owners' equivalent rent) as well as medical care. Compared to a year ago, overall consumer prices are up 1.8% while core prices are up 1.6%. Neither of these figures sets off alarm bells. Instead, they suggest the Federal Reserve's preferred measure of inflation, the PCE deflator (which usually runs a ΒΌ point below the CPI) will remain below the Fed's target of 2%. We don't expect this to last. Inflation probably bottomed in April when it was up only 1.1% from the prior year, and will be noticeably higher a year from now. However, for the Fed, the key measure of inflation is its own forecast of future inflation. So, even if inflation goes to roughly 3% in 2014, as long as the Fed projects the rise to be temporary it will not react to that inflation alone by raising short-term interest rates. The Fed is more focused on the labor market and, we believe, is willing to let inflation exceed its long-term target of 2% for a prolonged period of time in order to get the unemployment rate down. The worst news in today's report was that "real" (inflation-adjusted) average hourly earnings were flat in June, although they are still up 0.4% in the past year. Given today's news it looks like "real" (inflation-adjusted) consumer spending grew at a 1.3% annual rate in Q2, consistent with our forecast of 1.5% real GDP growth.
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Posted on Tuesday, July 16, 2013 @ 10:29 AM
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